The appellate gods can be cruel. A little less than two years ago, we blogged about Owen v Hurlbut, a resounding summary judgment win for a sister suing her brother for misappropriation of corporate opportunity and faithless servant arising from their co-ownership of a nursing home empire acquired and inherited from their father.
In Owen, Monroe County Surrogate and Acting Supreme Court Justice Christopher S. Ciaccio denied a converted dismissal-to-summary judgment motion by Robert Hurlbut (“Bob”) directed at a 20-count amended complaint filed by Christine Owen (“Christine”), and granted Christine cross-summary judgment on the amended complaint.
Christine's claims mostly related to an entity called ROHM Services Corporation (“ROHM”), which provided back-office, administration, and management services for the Hurlbut family's nursing homes now owned exclusively by Bob through separate LLCs.
Christine's claims fell into three general categories:
- the “underpayment” / misappropriation of corporate opportunity claim – Christine alleged that Bob “simply took ROHM's business without compensation,” transferring it to a newly-formed entity owned solely by Bob
- the “excessive compensation” / faithless servant claim – Christine alleged that Bob paid himself far more than market value in executive compensation to run ROHM
- the “undercharging” claim – Christine alleged that Bob operated ROHM at “break even,” charging Bob's separate nursing companies far less than market value
When last we reported on Owen, the motion court granted Christine summary judgment on both liability and damages on the excessive compensation claim, granted Christine summary judgment on liability only on the underpayment claim, and granted Bob summary judgment dismissing Christine's undercharging claim. It was a major win for Christine, with some major financial consequences for Bob: disgorgement of all compensation under the faithless servant doctrine for all of calendar years 2017, 2018, and 2019, totaling $1.6 million, and a future trial on damages on the underpayment claim.
But the appeal process began. In New York's liberal interlocutory appeal system, as a general rule, all Supreme Court civil litigation orders are directly appealable to the Appellate Division, with some rather arcane appellate rules carving out exceptions for things like decisions lacking an order, ex parte orders not made by motion upon notice, orders directing a hearing in aid of decision on the motion, sua sponte orders made at a discovery or status conference, oral decisions not reduced to a signed order, decisions on motions in limine or similar pre-trial evidentiary rulings, and so on. And sometimes the exceptions have their own exceptions.
Bob's Supreme Court loss fell comfortably within the sorts of orders immediately appealable as of right to the Appellate Division under Section 5701 of the Civil Practice Law and Rules. So appeal he did. A wise move in hindsight. Sure enough, Christine cross-appealed the denial of her motion for summary judgment on the undercharging claim.
For the facts and procedural history leading up to Bob's loss on summary judgment, we'll refer readers to our prior article on Owen.
The Appellate Arguments
In a beefy quartet of appeal briefs, brother and sister fired a barrage of appellate artillery at one another. Bob argued for reversal and dismissal of the amended complaint, or alternatively, for modification and denial of summary judgment, for alleged lack of standing to sue, absence of the required showing for misappropriation of corporate opportunity of a “tangible expectancy in the opportunity” (Alexander & Alexander of New York, Inc. v Fritzen, 147 AD2d 241 [1st Dept 1989]), and failure to eliminate the existence of triable issues of fact on the excessive compensation and faithless servant claims. Christine counter-argued for modification and grant of summary judgment on her undercharging claim.
You can read the four appeal briefs here, here, here, and here.
Sometimes an appeal is like a box of chocolates. You never know what you're going to get. In the ensuing appellate decision from last July, Owen v Hurlbut (240 AD3d 1199 [4th Dept 2025]), the Fourth Department gave both sides reasons to complain.
Standing to Sue
On the issue of standing, the appeals court construed Christine's complaint to incorrectly plead most of her claims directly and derivatively at the same time. Derivatively, Christine pled standing to sue on behalf of ROHM in two phases.
First, for pre-September 2022, Christine sued as executor of the estate of her late mother, Barbara Hurlbut (“Barbara”), who, before her death in 2022, was income beneficiary of a marital trust her husband established in his will that owned 100% of the shares of stock of ROHM.
Second, for post-September 2022, Christine sued as direct shareholder of ROHM when, after Barbara died, ROHM's shares passed pursuant to their father's will directly to Bob and Christine, as residuary beneficiaries of the marital trust.
“It is axiomatic,” wrote the Court, “that a shareholder has no individual cause of action to recover damages for a wrong against a corporation, even if that shareholder loses the value of their investment.” Instead, the Court explained, claims of “mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually.”
Applying this principle, the Court was of the view that “none of [Christine's] causes of action arise from an independent duty owed to plaintiff individually, unrelated to her status as a shareholder.” The Court dismissed Christine's claims to the extent she pled them directly. The Court still found standing to bring the claims derivatively, but just barely.
The Court noted a curiosity about Christine's claims: Christine “was a shareholder of ROHM at the time she brought the action,” but she “was not a shareholder of ROHM at the time of the transactions of which she complains,” violating the so-called “contemporaneous ownership rule.”
But the Court relied upon a rare statutory exception to the contemporaneous ownership rule found in Section 626 (b) of the Business Corporation Law where the plaintiff's standing derives from shares “‘acquired through a will or intestacy'” that “‘devolve by operation of law'” (quoting Pessin v Chris-Craft Indus., Inc., 181 AD2d 66 [1st Dept 1992]). So after winning resoundingly on the standing question before the motion court, Christine narrowly escaped dismissal before the appeals court.
The Excessive Compensation / Faithless Servant Claim
On the excessive compensation claim, the Court ruled that the motion court “erred” by granting Christine summary judgment on liability “because there are unresolved questions of fact on this record regarding that issue.” Sadly, the Court provided no further explanation for this holding.
But on the portion of the amended complaint for faithless servant, the Court reached a different conclusion, affirming the motion court's grant of summary judgment, writing that the lower court “properly determined” that Christine was entitled to “disgorgement of compensation under the faithless servant doctrine.”
The Court provided clarification about the scope of the equitable forfeiture doctrine: while a faithless agent forfeits the right to compensation, such forfeiture is limited ‘to compensation paid during the time period of disloyalty.” In the Court's view, Christine pled that Bob's disloyalty first began in “late 2019,” so the motion court “erred in determining that compensation should be disgorged for the time period from 2017 through 2019.” This holding gutted almost all of of Christine's $1.6 million recovery on the faithless servant claim.
The Underpayment Claim
On the underpayment claim, the appeals court ruled once again that “triable issues of fact remain” whether Christine was entitled to recover on a misappropriation of corporate opportunity theory, returning the case to the motion court for a trial on liability and damages.
The Undercharging Claim
Lastly, on Christine's cross-appeal, the appeals court ruled that the lower court “erred in granting” Bob's motion for summary judgment dismissing Christine's undercharging claim, finding yet again “triable issues of fact.”
Some Thoughts on Interlocutory Appeals
Scholars write multi-volume treatises on appeals and appellate practice. Here on New York Business Divorce, we aim for about 1,500 words. So I'll give just a few practical thoughts.
In New York's interlocutory appeal system, the real-world impact a successful appeal will have on the trajectory of a business divorce case depends heavily upon in which of the four Departments of the Appellate Division one brings the appeal. Some Departments move more quickly than others.
In the Second Department, even after an appeal is fully briefed – a process which can take nine months to a year – the Court often takes another 18 to 24 months just to calendar the appeal for oral argument. It is not uncommon for the appeal process in the Second Department to take three years.
In the First Department, things are different. Last year, in the First Department, I received a motion court's decision on January 8, perfected an appeal of the decision on January 16, argued the appeal on April 11, and received the First Department's decision modifying the motion court's decision on May 30. That degree of speed is uncommon, but still, motivated appellants in the First Department can often make very effective strategic use of interlocutory appeals.
Though every case is different, my general view is that a thoughtful, carefully framed appeal is well worth the money. In business divorce disputes, where technical legal rules like standing to sue and broadly-worded common-law doctrine like faithless servant often determine the outcome of cases, reasonable judges can differ on the right result. Reasonable difference of legal opinion is an appellant's best friend. And in some cases, motion courts can be just so wrong, or proceedings just so bogged down, that the only real hope of resolution is at the appellate level.
Owen is a fine example of how a successfully deployed interlocutory appeal can be a great return on litigation investment, in Bob's case lopping off well over $1 million in faithless servant disgorgement, ordering a trial on more issues than previously expected, certainly changing the dynamic of the case, and perhaps positioning the parties for a negotiated resolution.
If you or your company are contemplating an appeal, remember that the facts and procedural history before the appeals court are frozen in amber in the record on appeal, making the skill of the advocate even more important than usual. So choose wisely.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
